The Bank of Japan's interest rate hike expectations have significantly increased, and the yen is expected to rise against the dollar for four consecutive weeks

According to Zhitong Finance APP, the Japanese yen is expected to rise against the US dollar for four consecutive weeks, a strong weekly increase that is very rare for the yen, which has been depreciating in recent years. The spending data released by the Japanese government on Friday further indicates that the Bank of Japan is likely to raise interest rates again this year. Recent risk aversion in the financial markets has also driven global funds towards the yen and gold, while the other safe-haven currency, the US dollar, has faced selling pressure, mainly due to the dollar being at a high level and profit-taking sales triggered by uncertainties surrounding Trump's tariffs.

After a significant drop over the weekend, the yen began to rebound sharply on Monday due to safe-haven demand, strengthening against the dollar amid Trump's tariff threats. Subsequently, after Trump announced a delay in imposing tariffs on Canada, the dollar weakened significantly, and the yen continued to strengthen. Data released on Wednesday showed that Japan's wage growth recorded the largest increase in nearly thirty years, accelerating the yen's upward trend; on Thursday, a hawkish official from the Bank of Japan stated that borrowing costs are expected to at least double to 1% by the end of March 2026, further boosting the yen against all currencies.

Regarding the safe-haven sovereign currency yen, forex market strategists generally point out that given the recent rate hike measures by the Bank of Japan and the future monetary policy path leaning towards hawkishness, while major global central banks such as the Federal Reserve, European Central Bank, and Bank of England are trending towards easing paths, the yen still has room for appreciation this year, which should help significantly narrow the yield gap between Japan and other major countries.

The yen continued to rise against the dollar on Friday, with the commonly used measure of the dollar-to-yen exchange rate in the forex market falling to 150.96, the lowest level against the dollar since December 10, indicating continued appreciation of the yen. It then fell back to 151.53 at 12:15 PM Tokyo time. The yen's exchange rate against the dollar has increased by more than 2% this week, marking the largest increase since late November last year.

"The hawkish comments from Bank of Japan officials regarding domestic policy rates have sparked market enthusiasm for going long on the yen," said Jerry Minier, co-head of G10 forex trading at Barclays Bank in London. "We believe this is driven more by the yen than the dollar, as client interest in buying the yen against other currencies has significantly increased."

The strength of the yen is also attributed to investors reducing their long positions in the dollar. Due to the decline in US Treasury yields across various maturities and Trump's decision to delay tariffs on Canada and Mexico, the dollar has retraced its overall gains from earlier in the week.

Forex traders expect some volatility in the market as traders remain cautious about the outcome of the highly anticipated meeting between Japanese Prime Minister Shigeru Ishiba and US President Trump on Friday, with the market highly alert to any comments regarding tariffs or yen weakness. Additionally, the market is also focused on the US non-farm payroll report Strong Economic Data

This week, Japan's economic data was unexpectedly strong, sparking speculation in the market that the Bank of Japan may raise interest rates faster and more significantly than traders previously anticipated. In addition to the wage data for December, household spending growth was five times what economists expected, marking the largest increase since August 2022.

Even as the dollar/yen benchmark fell below the 150 level, some strategists indicated that there may be limited room for further appreciation of the yen. The appetite of Japanese retail investors for overseas stocks and Japan's negative real interest rates are expected to continue to put pressure on the yen exchange rate.

Despite the further downside risks for the dollar-yen benchmark in the short term, Barclays strategists Shinichiro Kadota and Lhamsuren Sharavdemberel wrote in a report: "Unless there is a significant risk aversion sentiment, we do not expect the dollar to yen to sustain a sharp decline, as Japan's capital outflow trend continues to exert pressure on the yen exchange rate."

Nevertheless, traders in the financial markets continue to increase their bets on the Bank of Japan raising interest rates again, with overnight index swap pricing showing that the probability of the Bank of Japan choosing to raise rates before July has surged to 80%, and the probability of a rate hike before September is as high as 100%, with bets on more than two rate hikes this year, which is positive news for the yen.

These bets are supported by the Bank of Japan's most hawkish member, Naoki Tamura, and former Bank of Japan Governor Haruhiko Kuroda. Tamura hinted at further rate hikes shortly after speaking on Thursday, and former Governor Kuroda stated that Japan has "completely" ended deflation, making it natural for the Bank of Japan to continue normalizing its monetary policy.

On Tuesday, former Bank of Japan Executive Committee member Hideo Hayakawa also stated in a media interview that the financial market's consensus that the Bank of Japan's rate hikes will stop at 1% is "incorrect."